Our answers to today s challenges: Cycle management, diversification and innovation

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1 Image: used under license from Shutterstock.com Our answers to today s challenges: Cycle management, diversification and innovation Torsten Jeworrek, Anthony Kuczinski, Thomas Blunck Monte Carlo, 14 September 2014

2 Agenda Global reinsurance landscape Solutions for the US market Munich Re innovations Key takeaways Torsten Jeworrek Anthony Kuczinski Thomas Blunck Torsten Jeworrek Cycle management, diversification, innovation; Monte Carlo 14/09/2014 2

3 Global reinsurance landscape Competitive reinsurance landscape requires strict cycle management Cyclical challenges Availability of alternative capital 1 US$ bn Low interest rates + Low inflation + Benign claims experience H2014 Largely driven by scarcity of investment opportunities in the low-interestrate environment Abundant excess capital in primary insurance and reinsurance for quite a few years now Higher retentions, also driven by global players centralising their buying programmes Direct impact Most notable in US nat cat XL business Short tail predictable capital deployment External models available know-how without infrastructure Indirect impact Accelerator for price competition among some traditional reinsurers Fight for market share Softening terms and conditions Spill-over effects as less diversified players expand business to other areas and perils 1 Source: Aon Benfield, Munich Re Cycle management, diversification, innovation; Monte Carlo 14/09/2014 3

4 Global reinsurance landscape Moderate reinsurance premium growth, stronger growth in primary insurance expected Global premium development from / 2014e 2016e bn P/C RI: Ceded premiums 2013 P/C RI and PI real growth rates (CAGR) Africa/Middle East (5%) Latin America (7%) Total ~182 = 100% 66 Europe (36%) RI PI Europe -1% 1% -1% 2% North America -1% 1% -1% 2% Asia Pacific 2% 3% 6% 5% Asia Pacific (25%) 49 North America (27%) Latin America 7% 4% 8% 5% Africa/Middle East 3% 5% 4% 6% Total 0% 2% 1% 3% Source: Munich Re Economic Research Cycle management, diversification, innovation; Monte Carlo 14/09/2014 4

5 Global reinsurance landscape Diversification and specialised risk expertise for complex tailored solutions in focus Major reinsurance market movements Growing wealth and increasing insurance density Opportunities Industrialisation in regions exposed to nat cat Increasing demand for nat cat capacity Stricter regulatory requirements favour RI solutions RI as an attractive long-term vehicle for balancing operating results and as an efficient solvency management instrument Demand for complex, nonstandard solutions optimising risk and capital Demand for risk transfer becomes smarter and more challenging Operational excellence, diversification and specialised risk expertise is key Abundant capacity from traditional RIs and alternative sources New capital influx with limited appetite (high US property cat layers) Increasing equity of insurance players available Less diversified RIs under pressure, further consolidation possible Drivers for supply Cycle management, diversification, innovation; Monte Carlo 14/09/2014 5

6 Global reinsurance landscape Global risk landscape discloses demand for new solutions in the area of (re)insurance Global risk landscape Technology Cyber risks Energy risks Supply chain risks Non-damage business interruption Society Contentious diseases Rising cost of medical treatment and nursing care Reputational risks Environment Climate change Weather events Water crisis Politics Regulatory changes Global governance failure Political and social instability/conflicts Opportunities for the insurance industry The growing economy is leading to emerging risks worldwide They derive from the areas of technology, environment, society and politics Global risks can be mastered by means of new insurance solutions to mitigate risk potentials High demand for complex tailored solutions in the current market environment Reinsurance as a trusted partner in developing new solutions for worldwide portfolios Expansion of the boundaries of insurability needed Global threats call for new insurance coverage Cycle management, diversification, innovation; Monte Carlo 14/09/2014 6

7 Solutions for the US Market US: Servicing the largest (re)insurance market with the full range of products and distribution channels US the largest (re)insurance market in the world Full range of products and distribution channels US premium volume P/C bn US P&C market 43.5bn Primary insurance Reinsurance Munich Re US portfolio: GWP P/C 2013: 5.7bn 2 Profitable business in a highly competitive market 1 Managing General Agency 2 Incl. business from Munich Re Risk Solutions Cycle management, diversification, innovation; Monte Carlo 14/09/2014 7

8 Solutions for the US Market Capital relief transactions: Solutions for clients to maintain their rating CRT solution Which risks are covered? Business (multi-line) Volatility (catastrophe) Financial (rating/solvency) Potential benefits for the client? Multi-year surplus relief Catastrophe relief (limited) A.M. Best rating maintained at A- / downgrade prevented Image: used under license from Shutterstock.com Munich Re strength Underwriting know-how, financial analysis and catastrophe modelling Target clients Innovation Balance sheet challenges caused by increased natural hazard volatility and man-made severity risks Multi-year, variable whole-account net quota share treaty with various options, depending on the development of the business result (e.g. sliding-scale commission, capped cat limits, commutation options) Cycle management, diversification, innovation; Monte Carlo 14/09/2014 8

9 Solutions for the US Market Inland low-hazard flood reinsurance fills important coverage demand Homeowners flood endorsement Which risks are covered? Potential benefits for the client? Inland flood risks no Atlantic coastal counties Low-hazard flood only No prior flood experience Only homes built after 1975 Differentiator in product offering vs. competitors Fills important gap in coverage, thus mitigating claims issues Low-limit/low-premium/opt-out model Image: used under license from Shutterstock.com Munich Re strength Target clients Innovation Reinsurance client relationships, actuarial and catastrophe management expertise American Modern expertise on forms, filing and claims handling Hartford Steam Boiler s historical success with private label operational model Regional clients with no Atlantic coastal county exposure Avoidance of Atlantic coast in order to prevent correlation with Atlantic Hurricane budget scenarios By leveraging the combined strengths of reinsurance and specialty units, Munich Re America Inc. is uniquely positioned to offer premium flood cover and to fill an important market need Cycle management, diversification, innovation; Monte Carlo 14/09/2014 9

10 Solutions for the US Market Adverse loss development covers Protecting clients through whole account Whole-account adverse loss development cover Which risks are covered? All lines of business written by the company Predominantly workers compensation and casualty exposures Assumed reinsurance portfolio Potential benefits for the client? Protection of financial rating from potential downgrade Control of earnings volatility from legacy portfolio Capital preservation Image: used under license from Shutterstock.com Munich Re strength Target clients Efficient and agile collaboration between US and Munich experts (dedicated Customised Portfolio Solutions Unit, underwriting, claims, actuarial), client-centric focus, long-term trading relationship and in-depth portfolio knowledge enables quick execution for client Companies in need of capital and/or ratings protection due to adverse loss development from legacy exposures, specific lines of business and/or classes Innovation Reinsurance structure that provides significant capacity for liabilities dating back 50 years and consultative discussion on rating-agency impacts Cycle management, diversification, innovation; Monte Carlo 14/09/

11 Solutions for the US Market Munich Re in the US: Profitable business in a highly competitive market Situation US market most affected by alternative capital Highly competitive, sophisticated and mature market Objective Cycle management and strict underwriting is key Diversification more important than ever Munich Re Balanced book in reinsurance and specialty insurance Stability in core reinsurance and growth driver specialty insurance Strong position in tailor-made reinsurance solutions Cycle management, diversification, innovation; Monte Carlo 14/09/

12 Munich Re innovations Risk Solutions business mostly detached from reinsurance cycle Munich Re P/C portfolio 2013 Risk Solutions premium split 1 % Combined ratio 1 % Risk Solutions 24% TOTAL 17bn Traditional reinsurance 58% Tailor-made solutions 18% Watkins 12% Other 19% Specialty markets 12% TOTAL 4bn CAGR % American Modern 23% Corporate Insurance Partners 16% Hartford Steam Boiler 18% Differentiating pillar Additional competitive edge Further growth potential New solutions, innovative products and services Strong bottom-line contribution Diversification and high level of expertise providing flexibility in managing the portfolio 1 Gross earned premium. Management view, not comparable with IFRS reporting Figures for Hartford Steam Boiler included since consolidation as at April 2009 Cycle management, diversification, innovation; Monte Carlo 14/09/

13 Munich Re innovations Product development network among Risk Solutions units fosters innovation Innovation network across Munich Re units Approach Facultative units MWCA 2 American Modern SER 3 Innovative products expand the existing market boundaries and therefore constitute a significant growth opportunity For instance in the key areas of cyber risks, energy risks, supply chain risks, non-damage BI risks, reputational risks or flood risks HSB 1 Focus on direct industrial/commercial business and niche segments Specialty markets Space Watkins Systematic product development across the whole Group exploiting synergies Possibility of corporate ventures with innovative start-ups in other industries 1 Hartford Steam Boiler 2 Munich Re Weather & Commodity Risk Advisors 3 Special Enterprise Risks Cycle management, diversification, innovation; Monte Carlo 14/09/

14 Munich Re innovations Cyber Cover to protect against many risks originating from the use of IT and data Cyber risk cover Which risks are covered? Broad range of computer-, data-, and network-related first- and third-party risks Not only privacy-related risks Potential benefits for the client? Tailor-made cover for a company's cyber risks Broad scope of cover Larger-than-average limits Technical IT due diligence Image: used under license from Shutterstock.com Target clients Cloud-computing providers, oil and gas, energy, automotive, airlines and airports, railways Innovation Bespoke client or industry approach with focus on real business impacts and enhancement of new business opportunities Cycle management, diversification, innovation; Monte Carlo 14/09/

15 Munich Re innovations Space Insurance for the entire life-cycle of a satellite End-of-life cover for satellites Which risks are covered? Space insurance covers the value of satellites during their operation Markets currently offer cover for satellites mainly on a launch-plus-one-year basis Subsequent years of use are covered on a yearly basis Munich Re has developed cover extending over a satellite s entire life-cycle (~15 years) Potential benefits for the client? Strongly reduced uncertainties for the satellite operator This should result in: better terms from financiers; reduced uncertainty about future expenditures for inorbit premiums to be paid and regarding possible coverage restrictions Image: used under license from Shutterstock.com Innovation By extending the boundaries of insurability, we turn something that is currently placed in the traditional market into a non-traditional product Cycle management, diversification, innovation; Monte Carlo 14/09/

16 Munich Re innovations Reputational risk cover Designed to protect against loss of profit due to reputational issues Reputational risk cover Which risks are covered? Loss of profit after a reputational and brand-valuerelated event All risks with exclusions Potential benefits for the client? Individually designed to protect the income of companies with significant intangible assets Parametric approach Source: dpa Picture Alliance / Peter Mayer Target industries Food and beverage, restaurant chains, apparel/fashion, luxury goods, toys, cosmetics Innovation Defined parts of the entrepreneurial risk can be insured Cycle management, diversification, innovation; Monte Carlo 14/09/

17 Munich Re innovations Project cost insurance Cover for the remaining risk of increasing costs of construction projects Project cost insurance Which risks are covered? Increase in investors actual construction costs vs. costs predicted virtually All risks with exclusions Potential benefits for the client? Sophisticated planning Cost certainty of projects Facilitated financing Project transparency Risk and project controlling Image: used under license from Shutterstock.com Target industries High-rated building investors Innovation Latest technical development 1 enables insurance solution 1 itwo 5D = Technology of RIB Software AG Cycle management, diversification, innovation; Monte Carlo 14/09/

18 Munich Re innovations Risk Solutions is an important driver of innovation for reinsurance business as a whole Insurance product life-cycle ILLUSTRATIVE Innovation within dedicated special units Primary insurance growth Maturity/standardisation Premiums Research and development Direct marketing by business units of Risk Solutions or joint approach with reinsurance clients Transfer to the reinsurance market Time Innovative product development will have increasing relevance in the future Core element of our value proposition for reinsurance clients Further demand for capacity to be expected, e.g. cat cover for cyber accumulation Cycle management, diversification, innovation; Monte Carlo 14/09/

19 Key takeaways World of opportunities in property/casualty reinsurance requires different strategies Understanding accumulation Smart solutions for well-known existing risks Understanding a client s demand New covers for emerging risks Strict portfolio and cycle management Resist short-term pricing pressure Insight into technology and loss potential Hidden demand for underinsured risks Munich Re well-positioned for all kinds of market challenges Cycle management, diversification, innovation; Monte Carlo 14/09/

20 Disclaimer This presentation contains forward-looking statements that are based on current assumptions and forecasts of the management of Munich Re. Known and unknown risks, uncertainties and other factors could lead to material differences between the forward-looking statements given here and the actual development, in particular the results, financial situation and performance of our Company. The Company assumes no liability to update these forward-looking statements or to conform them to future events or developments. Cycle management, diversification, innovation; Monte Carlo 14/09/